What credit score do you need to buy a house?

Unless you’re paying all cash for a home purchase, your credit score is crucial to securing financing from a lender. Not only is your credit score one of the most important factors lenders use to qualify you for a mortgage, but it also contributes to the loan’s conditions and terms. For the most part, a higher score will help you qualify for lower interest rates and better terms.

But what credit score do you need to buy a home? The minimum credit score for a mortgage will vary depending on your chosen lender and the type of home loan you’re seeking.

What is a good credit score to buy a house?

Your credit score is considered by lenders because it showcases your financial responsibility and how well you manage debt. There’s no single credit score number that will guarantee your approval for a mortgage, and the minimum score requirement for different mortgage products will vary depending on your lender.

In most cases, you need to have a minimum credit score of 620 when you are submitting mortgage applications. This number is considered a fair rating on the FICO model for credit (used by most lenders). FICO credit scores range as follows:

• 780 and higher: Outstanding
• 760 – 779: Excellent
• 720 – 759: Good
• 660 – 719: Average
• 620 – 659: Fair
• 619 and below: Poor

How to increase your credit score before buying a house

Meeting the minimum credit score for your preferred home loan may get your application through the approval process, but taking steps to improve your score prior to applying can set you up for more savings in the long run. If your score is 740 or above, you’re already in a great position to acquire a good rate, save on private mortgage insurance (PMI), and contribute a lower down payment.

However, if you are looking to improve your credit score prior to starting the homebuying process, here are a few actionable steps you can take now:

1. Focus on paying off or paying down your current debt. On top of improving your score, paying down debt will also improve your debt-to-income ratio (DTI).
2. Set up automatic payments and ensure you’re paying your bills on time. Your payment history is a big consideration for your credit score and showcases your financial responsibility to potential lenders.
3. Raise your credit limit and reduce your balance. If the option is available to you, raising your credit limit while reducing your balances is a great way to improve your score. Generally, it’s good for your overall credit score to only use a third of your available credit.
4. Avoid applying for other new loans (for example, personal loans, car loans, etc.). As is evident by the previous step, the less debt you have, the better, so it’s best to not take on other loans during the mortgage process. It’s worth noting that requests for new loans require a credit pull and will result in your score dropping a few points.
5. Don’t open new credit card accounts or close existing lines of credit. Similar to applying for other loans, opening new credit accounts or closing ones you currently have will also result in a drop on your credit score.

Additional considerations before buying a house

Don’t forget that your credit score is just one aspect that lenders will take into consideration when they receive your mortgage application. It’s important to understand how the following conditions are also factored into your loan approval:

• Debt-to-income ratio (DTI) — A DTI ratio of 35% or less is considered good, although anything higher than 43% may be considered too risky by most lenders.
• Income — While it is possible for low-to-moderate income borrowers to buy a home, if you’re expecting a pay increase or promotion in the near future, consider holding off on a home purchase in the meantime.
• Pre-qualification and pre-approval — Though you can calculate how much mortgage you can afford with a mortgage calculator, getting pre-qualified by a lender will provide you a specified range so you can start house hunting. Getting pre-approved will set you up to be a serious buyer in the eyes of sellers and you’ll be ready to negotiate a price.

It's also important to thoroughly research different lenders before committing to one and applying for a mortgage. Different lenders will offer different mortgage loans, varying rates, and borrower requirements. Taking the time to compare lenders may help you secure the best mortgage deal possible.

Overall readiness to buy

At the end of the day, every homebuyer’s situation is unique. There is no single factor that determines when you’re considered ready to purchase a house. However, there are aspects of your finances that you can take control of to secure the best mortgage terms available.

Taking stock of your current debts and bills and working to improve your credit score will go a long way in helping you obtain a mortgage loan that suits your needs.